Feb. 26 (Bloomberg) -- BAE Systems Plc and the British
government are in talks to adjust warship manufacturing to avoid
disruptions from reducing levels of work, according to Bernard
Gray, the U.K.’s chief of defense material.

The timing of the shipbuilding already included in the
government’s equipment plan could be adjusted, Gray said
yesterday at the International Institute of Strategic Studies in
London. “Our aim, of course, is not to form some gap where
nothing happens but to have a successful transition,” he said.

BAE, which consolidated U.K. warship building capacity in
2009, lacks work to sustain three shipyards in England and
Scotland and is considering closures to adapt to demand. After
completion of two Queen Elizabeth-class aircraft carriers due to
start coming into service in 2018, activity will dip before the
building of Type 26 frigates commences. Several thousand
engineering jobs are at stake, according to the Unite union.

“We are working with the industry to make sure we have a
smooth transition between the aircraft carriers and Type 26,”
Gray said. “There are a variety of choices.”

U.K. shipbuilding is “at a multi-decade high,” said Gray,
who didn’t address how many shipyards the government wants to
sustain. “There is some relativity to consider here about what
the appropriate size of the shipbuilding industry is going to be
for a sustainable, long-term future.”

The shipyards involved in a potential adjustment are
located in Portsmouth, England, and Scotstoun and Govan in
Scotland.

Overcapacity, Duplication

BAE Chief Executive Officer Ian King said last week that
discussions with the government are taking place. The company,
Europe’s largest arms manufacturer, has announced possible job
cuts of as many as 3,500 workers in its U.S. naval shipyard
business as the Pentagon reduces spending.

Gray said industrial capacity concerns stretch beyond the
U.K. because of multiple suppliers of frigates and four makers
of aircraft carriers. “Within Europe we have overcapacity and
duplication,” he said.

The situation is similar in areas including armored vehicle
production, where Europe will have 23 manufacturing programs in
the next decade, Gray said. More cooperation is needed between
allies, the former Financial Times journalist said.

“The challenge for us is looking at the programs of the
future -- what are we prepared to do to pool and share,” Gray
said. One opportunity to cooperate could come on a future
utility vehicle for ground forces, he said.

‘Do Better’

The U.K. and France agreed in 2010 to cooperate more
closely on national security issues, including on a range of
defense equipment programs. A U.K. spending review in the wake
of the pact and last year’s change in French government have
hampered advances, stalling cooperation in missile and unmanned
aircraft programs.

“Our collective progress has not been as swift as either
of us would want,” Gray said. “We should do better than
this.”

BAE said last week it will buy back shares worth as much as
1 billion pounds ($1.52 billion) over three years after demand
outside the U.S. and the U.K. helped swell cash reserves. The
move pleased some BAE investors, who had opposed a plan to merge
with European Aeronautic, Defence & Space Co. That effort failed
on opposition from the German government.